What Are the Payroll Taxes in California?

Payroll taxes are mandatory contributions from employers and employees, calculated as a percentage of wages. While federal payroll taxes apply nationwide, California also imposes its own state-specific payroll taxes. This article explains California’s state payroll tax system, including relevant federal tax information.

Employer Responsibilities Before Withholding

Before withholding and remitting payroll taxes in California, employers must take several steps. Employers must first obtain a Federal Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This nine-digit number serves as a unique tax identifier.

After obtaining an EIN, employers in California must register with the Employment Development Department (EDD) to get an EDD employer account number. This is required for any employer paying over $100 in wages per calendar quarter for services in California. Registration with the EDD should occur within 15 days of becoming subject to unemployment insurance laws.

Establishing a payroll system or engaging a payroll service provider is also necessary. This setup facilitates accurate calculation, withholding, and timely remittance of all applicable payroll taxes. It helps manage employee records, track wages, and ensure adherence to state and federal regulations.

Understanding California State Payroll Taxes

California employers and employees contribute to several state-specific payroll tax programs. Understanding each tax involves knowing its objective, who funds it, and how the contribution amount is determined.

Unemployment Insurance (UI)

California’s Unemployment Insurance (UI) program provides temporary wage replacement benefits to eligible workers who lose their jobs. This tax is paid solely by the employer. New employers are typically assigned a UI rate of 3.4% for their first two to three years.

Subsequently, an employer’s UI tax rate varies from 1.5% to 6.2% for 2025, based on their experience rating. This rating reflects the employer’s history of unemployment claims, with fewer layoffs resulting in lower rates. The UI tax applies to the first $7,000 in wages paid to each employee annually.

Employment Training Tax (ETT)

The Employment Training Tax (ETT) funds job training services for California workers. This employer-paid tax provides industry-specific training. The ETT rate for 2025 is 0.1%.

The ETT applies to the first $7,000 of each employee’s wages annually, for a maximum of $7 per employee. Employers with a positive UI reserve account balance pay this rate. Those with a negative UI reserve account balance do not pay ETT.

State Disability Insurance (SDI)

California’s State Disability Insurance (SDI) program provides partial wage replacement benefits to eligible workers due to non-work-related illness, injury, pregnancy, or Paid Family Leave (PFL). This tax is paid entirely by employee contributions through payroll withholding.

For 2025, the SDI withholding rate is 1.2%. Effective January 1, 2024, the taxable wage limit for SDI contributions was eliminated. Employers can offer an approved Voluntary Plan (VP) as an alternative to the state SDI program, provided it offers benefits equal to or better than SDI and does not cost employees more.

Personal Income Tax (PIT) Withholding

Personal Income Tax (PIT) withholding is a prepayment of an employee’s estimated state income tax liability. Employers withhold these amounts from employee wages and remit them to the state. The amounts withheld are determined by information provided by the employee on the Employee’s Withholding Allowance Certificate (DE 4) form.

The DE 4 form allows employees to specify their marital status and claim allowances, influencing the amount withheld. If an employee does not provide a completed DE 4 form, employers must withhold tax as if the employee is single with zero allowances. Employers use state withholding tables and methods to calculate the appropriate PIT withholding amounts.

Federal Payroll Tax Context

While this article focuses on California’s state payroll taxes, employers also have federal payroll tax obligations. These federal taxes apply uniformly across the United States and fund national programs. They are distinct from state taxes.

The Federal Insurance Contributions Act (FICA) includes Social Security and Medicare taxes. Both employers and employees contribute to FICA. Social Security tax is 6.2% for both parties on wages up to $176,100 for 2025. Medicare tax is 1.45% for both, with no wage limit.

The Federal Unemployment Tax Act (FUTA) is another federal payroll tax that helps fund state unemployment insurance programs. FUTA is paid solely by the employer. It applies to the first $7,000 of wages paid to each employee annually. Employers can receive a credit against their FUTA tax liability for timely state unemployment tax payments, reducing the effective federal rate.

Reporting and Paying California Payroll Taxes

Employers must accurately and timely report and remit California payroll taxes to the Employment Development Department (EDD). The EDD’s e-Services for Business online platform is the primary method for managing payroll tax accounts, allowing employers to file returns, make payments, and update information.

Employers must file the Quarterly Contribution Return (DE 9) and the Quarterly Wage Report (DE 9C) each quarter. The DE 9 reconciles reported wages and paid taxes, while the DE 9C reports individual employee wages. These forms must be filed even if no wages were paid.

California payroll tax returns are due quarterly. For instance, the first quarter’s return (January 1 to March 31) is typically due by April 30. Electronic funds transfer (EFT) is a mandated payment method for most employers, with options like ACH Debit or ACH Credit. Failure to file or pay by due dates can result in penalties and interest.